Edited version of your written advice

Authorisation Number: 1012986780245

Date of advice: 20 May 2016

Ruling

Subject: Exemption from interest and dividend withholding taxes and immunity from income

Question 1

Is the Plan a 'superannuation fund for foreign residents' in accordance with the definition in subsection 118-520(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Is interest and dividend income received by the Plan from an Australian resident entity exempt from withholding tax pursuant to paragraph 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 3

Is the Plan immune from income tax on distributions it receives from its investment in Australian unit trust (AUT) under the common law doctrine of sovereign immunity?

Answer

No.

This ruling applies for the following periods:

Income years ended xxxx to xxxx

The scheme commences on:

xxxx

Relevant facts and circumstances

The Board was created by the Act (the Act) to administer and have the responsibility for operating the Plan.

The Plan is a cost-sharing, multiple-employer plan established and administered by the Board to provide retirement and disability benefits for employees of the foreign jurisdiction. The Plan is a pension trust fund of the foreign jurisdiction. The foreign jurisdiction has the authority to set or amend contribution rates.

The Board holds units in AUT.

The Plan is a defined benefit retirement plan that provides retired members with stable monthly pension payments for the life of the retiree. Payments to employees are determined by a formula applied to the member's salary history and years of qualified service.

All monetary assets of the Plan (including member's contributions) are deposited into the Fund and the Board has authority to invest the Fund.

The Board is exempt from taxes in the foreign jurisdiction.

The Plan

Eligibility

Membership in the Plan is a condition of employment. Members cannot withdraw funds while employed by an employer subject to the Plan.

Contributions

The quantum and timing of member and employer contributions are prescribed by the Act.

Types of benefits offered by the Plan

There are several types of benefits offered by the Plan, including:

• A return of contributions;

• Retirement annuity;

• Deferred retirement; or

• Disability retirement.

Return of contributions

Upon filing to the director, members are entitled to a refund of the total amount of their contributions upon termination of employment (subject to the Act for reasons other than retirement, disability or death) plus an interest charge as set by the Board.

Portability of benefits

As detailed above, upon termination of employment, a member may apply for a return of contributions. Amongst other things, this provides for the portability of a member's contributions to another superannuation or retirement fund or plan.

In addition to the ability to transfer benefits out of the Plan, through the return of contributions mechanism, in certain circumstances it is also possible to transfer benefits into the Plan.

Death benefits

The Plan provides for death benefits to be paid to survivors of members under certain circumstances.

Continuity

As the Plan is established by an Act of the foreign jurisdiction, it cannot be discontinued until the time the foreign jurisdiction repeals the Act or enacts contravening legislation. The terms of the Act do not provide for the winding up of the Board, the Fund and as a result the Plan at a defined point in time.

Shortfall in the Fund

To the extent there is a shortfall in the Fund, the foreign jurisdiction government would be required to account for such shortfalls to enable the satisfaction of the Plan's obligations to its members.

Other

The central management and control of the Plan is not carried on by Australian residents.

No deduction or tax offset is available in Australia for amounts contributed to or set aside for the Plan.

The interest and/or dividends received will be paid by a resident Australian entity.

Relevant legislative provisions

Income Tax Assessment Act 1936 paragraph 128B(3)(jb)

Income Tax Assessment Act 1997 section 4-1

Income Tax Assessment Act 1997 subsection 118-520(1)

Reasons for decision

Question 1

Detailed reasoning

Pursuant to subsection 118-520(1) of the ITAA 1997, a fund is a 'superannuation fund for foreign residents' at a time if:

(a) at that time, it is:

(i) an indefinitely continuing fund; and

(ii) a provident, benefit, superannuation or retirement fund; and

(b) it was established in a foreign country; and

(c) it was established, and is maintained at that time, only to provide benefits for individuals who are not Australian residents; and

(d) at that time, its central management and control is carried on outside Australia by entities none of whom is an Australian resident.

Furthermore, a fund is not a superannuation fund for foreign residents (subsection 118-520(2) of the ITAA 1997) if:

(a) an amount paid to the fund or set aside for the fund has been or can be deducted under this Act; or

(b) a *tax offset has been allowed or is allowable for such an amount.

Is the Plan a 'fund'?

The first question to consider in determining whether the Plan is a 'superannuation fund for foreign residents' within the meaning of section 118-520 of the ITAA 1997 is whether the Plan is a 'fund'.

The term 'fund' is not defined in either the ITAA 1997 or the ITAA 1936. Therefore, it should be given its ordinary meaning subject to the context in which it appears and having regard to any relevant case law authorities.

The Macquarie Dictionary [Online] defines the term 'fund' as

1. a stock of money or pecuniary resources. 2. a store or stock of something, now often of something immaterial. 3. an organisation which manages money invested for a particular purpose, such as superannuation.

In Scott v. FC of T (No 2) (1966) 14 ATD 333; (1966) 10 AITR 290; 40 ALJR 265 (Scott), Windeyer J expressed the view that 'fund' in the context of 'superannuation fund' ordinarily meant 'money (or investments) set aside and invested, the surplus income there from being capitalised'.

The Act creates the Fund. It is clear the Fund exists for a specific purpose as detailed in the Act concerning the allowable use of the Fund. Specifically, the Fund exists for the purpose of investment to allow the Board to meet its obligations to provide the members of the Plan benefits from the assets of the Fund. Therefore, it is concluded that the Plan is a 'fund'.

Is the Plan an 'indefinitely continuing fund'?

The term 'indefinitely continuing fund' in subparagraph 118-520(a)(i) of the ITAA 1997 is also undefined.

The Macquarie Dictionary [Online] defines 'indefinite' as

1. not definite; without fixed or specified limit; unlimited. 2. not clearly defined or determined; not precise.

The terms of the Act do not provide for the winding up of the Board, the Fund and as a result the Plan at a defined point in time. Furthermore, the winding up of the Board, the Plan or the Fund would require an Act of the foreign jurisdiction's legislature. On this basis, the requirement that the Plan is indefinitely continuing has been satisfied.

Is the Plan a 'provident, benefit, superannuation or retirement fund'?

The phrase 'a provident, benefit, superannuation or retirement fund' under paragraph 118-520(1)(a)(ii) of the ITAA 1997 is not defined in either the ITAA 1997 or the ITAA 1936. However, the phrase has been subject to judicial consideration.

In Scott, the High Court examined the terms 'superannuation fund' and 'fund'. Windeyer J enunciated at ATD 351; AITR 312; ALJR 278 that:

… I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income there from being capitalised.

In a later case, Mahoney v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519; (1967) 10 AITR 463 (Mahoney) the High Court took a similar view as in Scott, Kitto J expressed the view at ALJR 232; ATD 520; AITR 464 that:

…all that need be recognised is that just as 'provident' and 'superannuation' both referred to the provision of a particular kind of benefit - in the one case a provision against contemplated contingencies, and in the other case a provision, to arise on an employee's retirement or death or other cessation of employee, of a subvention for him or his estate or persons towards whom he may have stood in some kind of relation commonly giving rise to a legal or moral responsibility - so 'benefit' must have meant a benefit, not a general sense, but characterised by some specific future purpose.

The court found that the expression 'provident, benefit or superannuation fund' takes its meaning from past usage and the meaning of the several expressions must be arrived at in light of their ordinary usage.

In analysing the components of the expression, Kitto J interpreted the term 'benefit' to require a purpose narrower than the purpose of conferring benefits in a completely general sense upon employees. The benefit must be characterised by some future purpose e.g. a funeral benefit. On the same note, a provident fund must not refer to the provision of funds in a general sense, but must relate to a provision against contemplated contingencies.

Kitto J considered that the terms 'provident fund' and 'benefit fund' have historically been associated with friendly societies and provident societies. Benefit funds have a long history in the vocabulary of friendly and benefit societies, which have given the word a specialised meaning. These societies were established to provide 'benefits' for members on some defined occurrence e.g. sickness, accident, old age, and death.

Both of the abovementioned cases emphasise that the benefits must be provided for a specific purpose and require that there is a connection between the benefit received and the provision by the fund for retirement or death of a member or against 'contemplated contingencies', such as a sickness or accident.

It is considered that the Plan is a 'provident, benefit, superannuation or retirement fund' on the basis that:

• The Plan can be described as a 'superannuation or retirement fund' on the basis that its purpose is to provide the members of the Plan money benefits upon their reaching a prescribed age;

• The Plan can be described as 'provident' on the basis that it will provide money benefits upon particular contingencies (i.e. death, disability or retirement of members of the Plan);

• The Plan can be described as 'benefit' in nature as it provides benefits to a member upon their retirement, disability or death; and

• The terms of the Plan are consistent with a superannuation fund and the terms are strictly adhered to (evidenced by the fact that the terms of the Plan are enacted in law).

the fund must be established in a foreign country

The Plan has been established by an Act of the foreign jurisdiction and would therefore satisfy this requirement.

the fund must be established, and maintained, only to provide benefits to individuals who are not Australian residents.

The Plan has been established to provide superannuation benefits to specific members in the foreign jurisdiction and in all cases the member has a connection to the foreign jurisdiction. This requirement is satisfied.

the central management and control of the fund must be carried on outside Australia

The central management and control of the Plan is carried out by the Board. The Board is located in the foreign jurisdiction. This requirement is satisfied.

the entities carrying on the central management and control of the funds must not be Australian residents

The central management and control of the Plan is not carried on by Australian residents. This requirement is satisfied.

Negative Limb

No deduction or tax offset is available in Australia for amounts contributed to or set aside for the Plan.

Conclusion

All the requirements of subsection 118-520(1) of the ITAA 1997 have been satisfied. As subsection 118-520(2) of the ITAA 1997 has no application the Plan is a 'superannuation fund for foreign residents' in accordance with subsection 118-520(1).

Question 2

Detailed reasoning

Paragraph 128B(3)(jb) of the ITAA 1936 provides that liability to withholding tax does not apply to income that:

(i) is derived by a non-resident that is a superannuation fund for foreign residents; and

(ii)  consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and

(iii)  is exempt from income tax in the country in which the non-resident resides.

determine the entity which derives the income

The Board will derive the income in its role as administrator/trustee of the Plan and the Fund.

the entity which derives the income must be a non-resident

The Board is established in the foreign jurisdiction and its central management and control is carried on in the foreign jurisdiction. The persons carrying on the central management and control of the Board are not residents of Australia.

the entity which derives the income must be a 'superannuation fund for foreign residents'

The Plan is a superannuation fund for foreign residents as determined in Question 1.

the income in question must be interest, dividends or non-share dividends

The income in question will be interest or dividends.

the income in question must be paid by a resident

The interest and/or dividends will be paid by a resident Australian entity.

the income in question must be exempt from tax in the country in which the entity deriving the income resides

The Board and the Plan is exempt from income tax in the foreign jurisdiction.

Conclusion

Interest and dividend income received by the Plan from an Australian resident entity is exempt from withholding tax pursuant to paragraph 128B(3)(jb) of the ITAA 1936 as all the conditions in the provision are satisfied.

Question 3

Detailed reasoning

For Australian income tax purposes it is accepted that the doctrine of sovereign immunity applies to foreign governments or an agency of a foreign government that engage in governmental functions. This approach is consistent with the decision of the British House of Lords in the case I Congreso del Partido [1981] 2 All ER 1064 which held that activities of a trading, commercial or other private law character were not governmental functions.

To establish whether the doctrine of sovereign immunity applies to exempt Australian sourced income and gains of a foreign government or agency of a foreign government from Australian income tax and/or withholding tax, it is necessary to establish the following:

1. that the person making the investment (and therefore deriving the income) is a foreign government or an agency of a foreign government;

2. that the moneys being invested are and will remain government moneys; and

3. that the income is being derived from a non-commercial activity.

If these three conditions are satisfied, the Australian sourced income or gains will not be subject to Australian income and/or withholding taxes.

Condition 1 - foreign government or agency of a foreign government

An investment undertaken by a foreign government or agency of a foreign government will generally be accepted as the performance of governmental functions provided that it is within the functions of government.

The enactment of the Act established the Board, the Fund and as a result established the Plan under the law of the foreign jurisdiction.

The Board was created by the Act to administer and have the responsibility of operating the Plan, which provides retirement and disability benefits for employees of the foreign jurisdiction.

In view of the above, it is considered that the Board, as administrator/trustee of the Plan, is an agency of a foreign government. Therefore, the condition that the Plan administered is a foreign government or an agency of a foreign government is satisfied.

Condition 2 - government moneys

The following indicate that the monetary assets of the Plan, which are deposited into the Fund, are not and will not remain the moneys of a foreign government or an agency of a foreign government:

• membership in the Plan (being a defined benefit retirement plan) is a condition of employment;

• members and their employer are required by law to contribute a prescribed percentage of the member's salary to the Plan; and

• there are several types of benefits available to members of the Plan, including a return of contributions plus an interest charge on termination of employment (subject to the Act for reasons other than retirement, disability or death) allowing for the portability of a member's contributions to another superannuation or retirement fund or plan.

Accordingly, the Plan does not satisfy the second condition that the moneys invested are and will remain government moneys.

Condition 3 - non-commercial activity

In view of the conclusion on condition 2, it is unnecessary to consider condition 3.

Conclusion

As all the conditions for immunity to income tax under the common law doctrine of sovereign immunity are not satisfied, the Plan is not immune from income tax on distributions received from its investment in AUT.